Do Or Die

Thanks Phantom and SIUYA. To all: please refer to Introduction to Understanding Volatility for continued discussion.

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Hi, Volatility is key concept in trading just like trend, momentum, mean reversion and relative strength. However, it is a generic term used in several different contexts which can be confusing. I have not seen a comprehensive yet simple overview on volatility so will take a shot at this one. Why it is very important to understand volatility? Volatility itself is a primary measure of risk. Price volatility presents opportunities to buy assets cheaply and sell when overpriced. The wider the swings in instrument's price the harder emotionally it is to not worry. For trading instruments which have an expiry date (derivatives), it is not just important at which price you buy, but also the time at which you buy. For proper timing and understanding of volatility cycles is essential. Market moves in a cyclical fashion from phase of low volatility to high volatility and so on. These phases result in most technical chart patterns such as trading range compression, buying climax etc. When certain cash flows from selling a security are needed at a specific future date, higher volatility means a greater chance of a shortfall. Higher volatility of returns while saving for retirement results in a wider distribution of possible final portfolio values. Higher volatility of return when retired gives withdrawals a larger permanent impact on the portfolio's value. Volatility Metrics How a trader will define volatility depends upon the instruments he is trading and the timeframe being used for trading. A stocks trader will have a different perception about the volatility than an options trader. Volatility for an Investor has different meaning than (say) volatility for a short-term Trader. And again, volatility in a portfolio will be measured differently than volatility in stocks. There is significant overlap in these definitions (metrics) while categorizing by the types of traders. This article should supposedly help beginner traders in choosing the metrics most relevant to them. For Outright Traders Trading outright means taking a long or short position. The other important trading type is hedging. Standard Deviation: The s.d. of price returns over a certain period remains the most popular measure of volatility. Most technical indicators used for trading breakouts (like Bollinger Bands) use the same. Average True Range: ATR is usually calculated over daily ranges. This is very useful for daytraders and short-term traders. Traders use ATR to determine how far they need to place stop loss. Bands: The width of price bands like Bollinger Bands, Donchian Channels, Keltner Channels, regression channels etc. serve as a good indication of underlying volatility. For Option Traders Actual Future volatility: It refers to the volatility of a financial instrument over a specified period starting at the current time and ending at a future date (normally the expiry date of an option) Implied Volatility: it is the volatility that, when used in a particular pricing model, yields a theoretical value for the option equal to the current market price of that option. It is a forward looking measure. Historical Implied volatility: it refers to the implied volatility observed from historical prices of the financial instrument (normally options) Current implied volatility: it refers to the implied volatility observed from current prices of the financial instrument Future implied volatility: it refers to the implied volatility observed from future prices of the financial instrument For Investors Historical Volatility: or actual historical volatility refers to the volatility of a financial instrument over a specified period but with the last observation on a date in the past. VIX: It is a weighted blend of prices for a range of options on the S&P 500 index. The current market prices of all out-of-the-money calls and puts for the front month and second month expirations are used in calculation. This is the most favored one, the other important tickers measuring volatility are: VXO, VXN, RVX, VXD and VXX (etf). For Portfolios and managed funds (Hedge Funds) Beta: The beta is an important measure of risk. It is calculated by comparing the changes in returns of the portfolio with a benchmark. R-Squared: It is the correlation of a portfolio's movements to that of its benchmark. It measures the degree to which a portfolio's volatility is a result of the day-to-day fluctuations experienced by the overall market. For Trading Regime Analysis Noise: there are several statistical as well as simple technical methods to measure the amount of noise in a trading instrument over a period. Internal Movements: the strength of external movements to internal movements over a period of time is an important measure for placing stoplosses as well as targets. Price Shocks:some stocks are inherently more vulnerable to price shocks. For example, FSLR vs KO. Trading Ranges: The frequency at which prices remain in a trading range versus the time they spend trending. Stationarity: the level of stationarity in a time series serves several purposes such a detrending and trading pair identification For Fundamental Analysis Market Capitalization: Small caps tend to be more volatile than large caps. Share Holding Pattern: Amount of shares privately hold versus publicly hold is a good measure of stability. Leverage: the operating leverage which a company is employing also affects its volatility. Industry Groups: Business in certain industries is inherently more volatile than the others. For example, stocks of retailers are less volatile than those of internet companies. thanks, DD

Hi, I very much appreciate your response, but I think there has been some misunderstanding here. My short answer is "Context is king..." I will like you to take note that volatility has a totally different perception for a stocks trader vs a options trader. Say I'm a short-term stocks trader (holding one week to 2 months). I buy AOL in April around 19.00. It may have great daily range (ATR EOD (15)= 50 cent, 2.6% avg daily range) but its not moving around my buy price since last few months. I will be happy to dump it as low volatile. Compare it with KO which has daily movement of around 1.4% BUT it has been moving in the time frame relevant to me. I will consider KO as more volatile than AOL as a short-term trader with history of past few months. Terms are misused when they are used out of context. Terms are abused when they are used in a totally irrelevant context. There is a lot to volatility itself and perhaps it deserves a separate article. BUT what I'm talking here about is Trading Regimes. Beginners say all the time that MAs do not work, RSI do not works and so on. The fact is every trading technique/indicator works in a suitable regime. I will elaborate more on trading regimes soon.

Almost everyone acquainted with technical analysis knows that trend following indicators work great in trending markets while oscillators work great in range bound markets. What if we could predict accurately whether market will be range bound or trending tomorrow? Well, that would literally allow printing money by shifting from (say) MA crossovers and RSI signals. However, such holy grail does not exists. Mr. Market does not foretells, “Hey, I’m going to continue moving in this direction for next 3 weeks, so please carry your trade; Or I’m going to reverse trend tomorrow from such level so please book your profit and reverse your trade.” Trading Regime analysis means trying to identify similar periods of low volatility or price range contraction; and rising to high volatility or price range expansion. Regime analysis is looking to identify periods when conditions will calm down, at least in the direction of the immediately preceding trend, then this is similar to other so-called mean reversion. Market moves in phases of low volatility to high volatility. Phases of low volatility can be associated with prices stuck in a trading range, congestion area or a very slow trend. Similarly, phases of high volatility can be associated with clear, larger, and directional moves. Volatility is a very generic term used in reference to trading so let me elaborate what I’m referring by ‘volatility’ here. To clarify, I’m not referring to volatility as end-of-day price returns; but as the price changes relevant to the time frame you are trading. For a swing trader, a stock which hardly moves by 5% at end-of-month will be less volatile than a stock which moves 15% in a month. For a daytrader, a stock which moves by 0.5% will be less volatile at end-of-day than a stock which moves by 4%. I’m using ‘volatility’ in this article in reference to the expansion and contraction of price ranges for a particular time frame rather than the generic speed of change in the prices. Trading Regime refers to whether a market is in a trending mode, range-trading mode or whether it is doing a bit of both. My strategy focus is to identify when such trading regimes exist and when, more importantly, they are likely to change or switch. This can help choose the right trading or investment techniques that go with the particular trading regime and not try to persist with something that would obviously not produce good results in that regime. Let us get started with an example. The Standard Deviation on price changes on a rolling window of last 20 days is a crude way to measure volatility. The vertical lines on the chart indicate where the standard deviation has reached what could be thought of as historically low (hi) levels and we can see that the drop in the standard deviation to these low levels usually, not always but usually, precedes a strong trend like move in the price of the OIH. The calculation properties of the standard deviation simple support this observation. The standard deviation is calculating the distribution of price values over a specified time period and so if the standard deviation is low then it suggests that the distribution of price values has been occurring in a tight range. That is, the market has been range trading. Given the mean reverting (cyclical) nature of the standard deviation then, after a period of range trading, it is reasonable to expect the market to enter a period of higher standard deviation and that usually means a trending period. Sometimes, of course, the resulting price action is not a strong trend and the analyst has to be open to this possibility. However, the probability lies with the fact that after a period of price range contraction comes a period of price range expansion. In addition to a low standard deviation preceding a trending move in the market, a high standard deviation can precede a range-trading move in the market. Just as low volatility will probably be associated with a coiling price pattern such as a triangle and high volatility will probably be associated with a trend exhaustion turning phase perhaps with momentum divergence, candlestick reversals, volume considerations, gap theory and most other methodologies will all be cousins of each other. All these linkages are inevitable because we are, after all, analyzing the same underlying variable, the price; it is just that there are different ways of expressing the analysis. Technical techniques in relation to volatility breakouts have become popular whereby most people tend to think of these analyses as useful only for short-term market movements. This, is unjustified because whatever time frame (or fractal) is being examined, the market is being driven by the same underlying psychology that comes from human emotions. Price patterns repeat themselves at every degree of the market. A time series chart of one-minute closing prices will look similar in certain circumstances to a chart showing one month closing prices because the underlying driver of the market is the same human psychology that causes price trends and reversals of those trends. Trading regime analysis, can be broadened out considerably to look at both the long time frames as well as intraday time frames. As you must have already inferred from above discussion, for regime analysis we use components of market behavior which are cyclical in nature. The components could be any data related to price, volume, market internals or their derivatives. Among market data, the most useful is Volume, Hi/Lo Index, TICK and TRIN indicators. For price analysis, Elliott Wave can be particularly useful. Among price derivatives, the most useful are: Standard Deviation, ATR, Bollinger Band Width, Donchian Channels and ADX. I will soon elaborate techniques (usual technical analysis indications) on indentifying regimes through some examples. thanks, DD

Hi Phantom, Do you use time stops?

Update on the Watchlist AAPL: Flying high... first target will be 420 WDR: Buying opportunity with stoploss around 34 INFY: Wild gap down, no buying until that gap is filled SUN: Buying opportunity with stoploss around 38 UPS: weak buying opportunity, stock is currently in a congestion area ITW: Buying opportunity on EOD with stoploss 53.70; better buy on 60 inute charts KO: Buying opportunity with 66.5 as stoploss COP: Buying opportunity with stoploss 71.40 CVX: Buying opportunity, with target 120 AOL: still stuck in the trading range

Thanks TraderWinds :missy:

AAPL is a sufficiently liquid stock. Unless you are trading spikes or trading sub-minute time frames, there should not be much difference in paper or actual trading. There are few "bad prints" outside the best bid/order which may appear as a spike on charts, and through which you do not actually get filled in real trading. But these are occasional. It never really happened with me that a stock will spike up through my limit order without filling them.

I'm currently posting EOD charts, once done, will come back to your questions... intraday trading is a totally different ball game and the answers require starting from basics.

Current Watchlist: AOL, AAPL, WDR, INFY, SUN, UPS, ITW, KO, COP, CVX (9 stocks). All of these have been picked from strength shown by internal RS. Among these, AOL is a buy for on breakout only. For others, the market will probably cool off in this/next week, which may trigger buy entries.

I'm elaborating on Mega Overbought condition, as asked through PM. Criteria essential to this stage: - The instrument must be in obvious downtrend. - RSI must clearly reflect the downtrend by moving in the <60 area - All of a sudden, RSI sharply rises to >70 area, with a relatively little change in price The possible outcome is start of a fresh uptrend. You can see in the attached chart of Philadelphia KBW Bank Index, everything matches ideally. In the APPL chart in previous post, it matches loosely. Examples are the best ways to learn, so if anyone has questions I'll suggest to post charts. BTW about divergences, this one was Good based on factors I mentioned previously.

Adding AAPL to watchlist/portfolio. The stock was constrained for some time, as you can see the trading range and RSI unable was to move above 60 level. This breakout is strong and recent RSI swing suggests start of a fresh upmove. See the Mega Over bought stage mentioned earlier for comparison.

They'll probably fix it soon. There are still more sites like http://stockcharts.com/charts/ You seem to be serious about trading. If you want to spend daily even 30 minutes you can't get away with a software. Of course configuring and learning to use one will take time, but it is indispensable. Ninjatrade is still free I guess. Learning to manage data in it will take time, but its VERY powerful NinjaTrader stock, futures and forex charting software and online trading platform. Contact me through PM for some other options.

Some more examples to help you note subtleties. Good- prices making a double top, RS continually decreasing Good- Distinct peaks in prices after an extended upmove O.K.- the first set of consecutive peaks make a good divergence only. The next set mark a weak one. Good- inherent RS weakness Good- continual weakening RS OK- do not occur after a extended run, peaks are not distinct but rather caused by a gap Great! continual weakening in RS, volume shows exhaustion :missy: DD

Umfan92, replied to your post: http://www.traderslaboratory.com/forums/stock-trading-laboratory/9918-getting-started-stocks-2.html#post122737 ----------------------------------------------------------------- Like my previous post, I will try to make this exhaustive for absolute beginners. Others may like to skim the content as appropriate. Divergences Bullish Divergence occurs when a stock declines in RS while its prices keep increasing. Similarly, bearish divergence occurs when the stock prices keeps falling but it RS shows improvement. Obviously, this is an indication of weakness in prevailing trend. Experienced traders make decisions by factoring the change in RS in some form or other; and divergences can be a very good starting point for beginners to spot change in RS. Divergences are marked by matching peaks and troughs in prices and oscillators. In an uptrend, connect consecutive lows; you will note them as prices make a new low vs. the RSI begins to move higher. In a downtrend, connect consecutive highs; prices will make a new high while the RSI starts falling. Divergences tend to occur ALL the time and like any other chart pattern, there are several factors which strengthen or weaken them. Let’s look at them. If the divergence occurs at a slow hollowing price formation, it is the weakest Between two distinct peaks (troughs), it is better If the divergence occurs after a distinct up move or down move, with the definition of price making higher highs and oscillator making lower highs Divergence can also occur consecutively, another sign of indication With volume confirmation, still better With a confluence of candlestick patterns, still better. Note how the reversals are obvious and decisive... with several confluences like price and volume patterns. There are more relative terms coined by authors- Reverse Divergence or Hidden Divergence. These do not usually occur in stocks. These are typically opposite of those marked above, and indicate a peaking of RS rather than its weakening. Reverse divergences may occur when prices are range bound. Reverse bullish divergence the oscillator continues to make a lower low (after a downtrend), while the prices remain range bound. The oscillator is not constrained by a horizontal trendline and makes its peak toward the end of the trading range. Wait for the prices to make a breakout, at this time RSI will strongly support the new move. It is hard to spot them in/at the end of downtrend. If you do, the prices bottom out but the oscillator may mark a lower trough. :missy: DD

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You will need to contact them. It is paid.

not really... will be great if you can elaborate on its use

How short is the trend you're referring? it is very clearly weak on 60-miunte chart that I attached. RSI may be used for 2 minute charts also; but then, intraday trading is a totally different ball game. I wouldn't have noticed SIRI either- nothing particular. BTW do not use freestockcharts- it gives wrong value for RSI.

I understand. Try End of Day Stock Quote Data and Historical Stock Prices

Now this makes me feel worried. The stock is in a obvious downtrend. It has been sliding down smoothly. What signs of strength do you see? You should not be looking only recent price/indicator value. After a downtrend we can buy only on mega overbought. Divergence can indicate a reversal, but they need to be watched closely- I will soon elaborate on that soon. Hey, asking questions is the best way to appreciate the time I put down to write so much! -------------------------------------------------------------------------------- Last week the market has been strongly up- its late to find buying opportunities based on bottoming out through RSI divergence. See the attached AOL chart. RSI is strongly improving; RS(DOW) has been alarmingly coming down, but started improving recently. Lets keep it in watchlist.

I tried to put everything in one place to save the trouble of putting across different posts and then quoting Check this, if something is not clear put up as many examples as possible. Yes, RS on that site is calculated against SPY by default, but can be edited for any instrument of your choice. Forget ALAN, it is yet to stabilize from the recent price shock. See it's EOD chart (wild stock), I won't touch it unless very good fundamentals. Yes ABAT looks very week, RSI can be used on all time frames; attaching the hourly chart.

See... a lot can be hidden behind the chart. From the % returns for investments I can say that they are doing high beta trades, and not high alpha trades. I can show that if they are willing to provide proper trade data. Moreover, how do you verify that they are actually executing those trades (and not making them up).

Sounds awesome. Can you give some data on their performance please. I'll do the maths for their performance. You may like to check the wikipedia entry on ratios for performance measurement Sharpe ratio - Wikipedia, the free encyclopedia